Erica Winborne (not her real name) was divorced in 1988 from a man who lost his business and wound up owing the IRS a lot of money. The ex didn't pay his employee taxes, and the IRS came down on the household because Erica foolishly signed a joint tax return not knowing that her accountant-trained husband was using their personal credit cards and avoiding paying employee taxes to stay in business.
The ex-husband chivalrously allowed all the debts to be assigned to him in the divorce proceedings, but when he couldn't pay them, they ended up on her credit report as uncollected, ruining her credit for an additional seven years. (Contrary to popular belief, that seven years starts ticking at the last activity, not when the debt goes unpaid, so an unpaid debt with phone calls, partial payments, collection notices mailed and other actions can cause an account to stay on a credit report as uncollected for years and years. Even if the account is paid off, the collection process (late payments and other warts) remains for seven more years.)
By 1989, Erica lost her house to try to pay the back taxes and was on her knees in debt to the IRS for a "re-assessment" until the mid-90s. This was the brutal IRS era when there was no such thing as an "innocent spouse."
Erica's credit was destroyed, and it took her over 10 years to recover and get back on her feet, all while trying to raise two small children the ex left in her charge when he bolted the state.
But some stories have a happy ending. Or at least they should.
Today, Erica has a good job, the kids are doing well in school, and she has rebuilt her credit into a nearly perfect score.
Erica is trying to buy a house, but one day, like a monster out of a bad movie script, an old debt turned up again.
A Chase Manhattan Visa credit card balance resurfaced as unpaid, only the debtor wasn't Chase, but a company called LHR, Inc., a collection agency. The unpaid balance claim of $3,008 quickly dropped her credit score from 735 down to 700.
How did she know the debt was there? She didn't. Her lender told her about it after running her loan application. And the IRS lien, which was paid off in 1993, is still there, too.
Lucky for Erica, the packrat, she still had her IRS release-of-lien in a file and turned a copy over to her lender.
She contacted LHR, and told them that she didn't owe anyone $3008. The company told her that it would take 60 days to research the claim. She said she didn't have 60 days - she was trying to buy a house. The debtor suggested she FAX a dispute letter, so she did.
But something bothered her. She recalled getting a bogus collection letter in the mail a couple of years before, but she ignored it, knowing she had no Chase accounts and had never had one in her own name. On a hunch, she asked if LHR ever bought old accounts for collection.
The debtor admitted to Erica that his company did indeed purchase old accounts, and had purchased her account from another collection agency. She asked if, in his experience, other companies had ever sold charged-off debts to his company. He said they did, but if the other company couldn't produce documentation of when the account was opened or more information about the debt, then LHR would send a letter canceling the debt to all three credit bureaus, Experian, Equifax and Trans Union.
Within 24 hours, the debtor was as good as his word. He told Erica the other company could produce no record of the origination of the debt, so he faxed a letter to all three credit bureaus, copying Erica and her lender, asking that the LHR "trade line" be removed from their records.
Erica got her loan approval, but that's not the end of the story. The loan won't close for another six weeks when her new home is ready for move-in. A lot can happen between now and then.
Two days later, she got a new letter from another collection agency called Arrow Financial Services requesting payment of a Chase Manhattan Visa card that went into collections in 1988, this time in the amount of $11,546.06.
She insists that she and her husband never had an account balance that high, ever, and that she didn't recall but one Chase account that the couple had ever had, and if they had, it would have been charged off by 1996 or 1998. That was the one that LHR was trying to collect - or so she thought.
Now she's no longer sure that the LHR collection had anything to do with her ex-husband's old debts. With the debt charged off, there's just no way to prove it. Is this new debt collection scam a new kind of identity theft or fraud?
She immediately fired off a letter warning her lender, and a dispute letter warning all three credit bureaus of fraud.
Will she be able to close the house before Arrow notifies the credit reporting bureaus of nonpayment?
We'll see. But, the moral of the story is that no matter how good someone's credit is, problems can always arise that threaten closing.
Warn your buyers, sellers and homeowners to check their credit annually, just to make sure that bogus charges, errors or other problems aren't mucking up their credit reports and scores so they can take care of any issues before they talk to a lender.